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Indonesian Cattle Export Ban Hits AACo

19 March 2013

AUSTRALIA - Vertically integrated beef producer, processor and marketer, AACo posted a post tax loss of A$8.4 million over the last year.

Speaking at the company's annual meeting, chairman Donald McGauchie said the company had been affected by a number of negative market forces.

The result was primarily due to flow-on effects from the Federal Government’s live cattle export suspension in mid-2011, according to Mr McGauchie, which he said had significant and wide-ranging impacts for AACo and the industry as a whole.

As a result of the suspension, cattle which would have ordinarily been exported to the Indonesian market remained in the Australian market.

This caused over-supply issues and a subsequent deterioration in the domestic cattle price.

There are now two million more cattle in Australia than there were two years ago.

"This situation was exacerbated by dry conditions in the second half, which further contributed to the increased supply of grass-fattened cattle," mr McGauchie said.

AACo made a strategic decision to delay the sale of cattle to the end of the year to benefit from increased pasture, heavier sale weights and anticipated price rises.

"As the company values its herd on a mark to market basis, the increased herd size and the lower prices directly affected the final valuation," he added.

"The live export suspension has also created a challenging property market in northern Australia, which has led to a significant decrease in the value of AACo’s extensive land holdings in the region.

"This further impacted the company’s profit result through impairment costs of A$8.1 million."

The company now estimates total losses as a result of the live trade suspension, and the related devaluation of its northern Australian properties, to be A$51.2 million.

In 2011 losses as a result of the trade suspension were A$8.5 million.

Losses were also sustained from cattle falling out of specification and having to be delivered to markets in other locations, with increased handling and transport costs.

Despite significant rainfall in coastal Queensland, the dry conditions that have persisted into the first three months of this year throughout much of northern Australia continued to impact the mark-to-market valuation of our trading herd.

The continued high Australian dollar has also hit AACo.

AHowever, Mr McGauchie said that AACo has continued to achieve exceptional operational outcomes throughout the 2012 year.

The company ended the year with its largest herd on record.

AACo also met, or exceeded, weight gain and calving metrics during the year, ending the year with its largest ever number of calves branded.

The company also achieved a A$63 million turnaround improvement in operating cash flow, which Mr McGauchie said while it falls just short of AACo’s target to return to positive operating cash flow last year, it demonstrates a substantial improvement on previous years.

Last year also saw the first year of operations under the Federal Government’s Exporter Supply Chain Assurance System, or ESCAS, which was introduced in late 2011 following the lifting of the live export ban.

Mr McGauchie said that in some markets, these regulations have been challenging and costly to implement and supply chains have been restricted as a result.

In response to the Australian Government’s suspension of trade, the Indonesian Government accelerated its policy drive to have a self-sustaining cattle industry by 2014. Indonesia significantly reduced the number of import permits from Australia during the year – from 500,000 head in 2011, to 283,000 head in 2012.

This quota reduction, coupled with the upper weight limit of 350 kilograms for live exportfeeder cattle to Indonesia introduced in 2010, has created significant challenges for the beef industries in both countries.

Mr McGauchie said that Indonesia remains an important live export market for AACo, and he called on the Australian Government to renew efforts to rebuild our diplomatic and commercial relationship with Indonesia, which will continue to rely on Australia as local and reliable source of quality feeder and breeder cattle.

The company diversified its live exports into other Asian markets in 2012 to drive continued growth and lower the risk to the business.

AACo is now selling to exporters supplying several new and redeveloping markets, including Viet Nam and the Philippines, and will continue to further diversify in 2013 and beyond.

In October last year, following approvals from the Northern Territory Government, the Board approved the commencement of civil works and the appointment of contractors for AACo’s Darwin meat processing facility and work on the facility is now underway.

This plant will deliver increased vertical integration and improved proximity to key South East Asian markets.

Mr McGauchie said it will also secure the long-term future of Australia’s northern pastoral industry by providing the only material processing facility in the region, which has a total herd of over two million head.

Mr Mc Gauchie concluded: "AACo’s strategic geographic footprint and enhanced vertical integration mean the company is in a strong position to further grow its global supply chain and capitalise on the unprecedented demand for red meat protein from emerging Asian markets.

"We are confident that our strategy will continue to drive growth and value creation."

TheMeatSite News Desk

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